Frank and Joe help prevent 14-year-old cyclist Ken Blake from getting killed in an accident. As they help the boy up they see he is delivering an envelope to Victor Peters, a name that means something to the Hardys later on in the book.

The Hardys learn that their friend Chet Morton has been tricked when asked to make change for what turned out to be a counterfeit twenty dollar bill, something that the police later confirm is becoming more common in their town of Bayport.

Later, Joe is awakened by a clattering sound and sees a mysterious figure bicycling away from the Hardys' home. While investigating the disturbance a note is found that reads, "Drop case or else danger for you and your family." The Hardy boys are not sure if this threat refers to the counterfeiting case that Frank and Joe are investigating or another case their detective dad, Fenton Hardy, is trying to solve.

The Hardys go with Chet, who wants to apply for a job at Elekton Controls, a missile-development company, but are told by Mr. Markel, one of Elekton's security guards, that there are no openings. Before leaving, they notice a bike that looks similar to the one ridden by Ken Blake and that is likely to have been used by the person who left the threatening note. Mr. Docker, an Elekton maintenance man, tells them that Ken does odd jobs for the company, but that he is not there at that time, even though Joe is certain he saw Ken looking out an adjacent old watermill's window at them. The Hardys, their girlfriends, Iola Morton and Callie Shaw and Chet go nearby to have a picnic but an arrow is shot at them with an attached note reading, "Danger. Hardys beware."